Clearing the haze from insolvency

25 Apr 2017

Today marks the first anniversary of the 90-year old retailer, BHS, collapsing into administration. Also, just a few weeks ago the notorious, struck off ‘human rights’ lawyer Phil Shiner made the headlines by going bankrupt.

In some reporting of these stories, the usual tired myths about insolvency cropped up, so today seemed like a good time to bust some of them.

Bankruptcy makes your debts go away

Well yes, technically it does, (or at least most of them).

But it makes your assets ‘go away’ too.

Whatever you owned immediately before bankruptcy, you lose to your trustee in bankruptcy who will sell those assets to pay your creditors. Only if the value of the assets is substantially higher than your debts might you get anything back at the end, but don’t hold your breath.

It doesn’t end there. If you are employed, the trustee in bankruptcy can ask the court to order your employer to divert a proportion of your salary directly to the trustee in bankruptcy every month for up to three years.

If I transfer my property before I’m bankrupt, then my creditors can’t have it.

Wrong. If you’ve given the property away, or sold it for less than it is worth, your trustee in bankruptcy will look to claw it back by suing the recipient of the property (they won’t thank you…).

Bankruptcy will let me forget about my debt situation altogether

Not correct. You will have to attend at least one lengthy interview with the trustee in bankruptcy, and have long forms to complete. You may also be ordered to go before a judge to answer questions if you fail to fully cooperate.

The process is complete after one year

Incorrect. You have strict legal duties to cooperate with your trustee in bankruptcy to help him establish where all the assets are and who all the creditors are. This duty to cooperate lasts as long as your bankruptcy stays open which is often substantially longer than the usual one year before you are discharged from bankruptcy. Also, if you don’t cooperate you can be held in criminal contempt of court, and your discharge of bankruptcy can be suspended indefinitely.

If I’m a director of a company that goes into insolvency I will be banned from being a director

It really depends. Directors can only be disqualified from being a director of another company if they have done something wrong.

Frequently a company’s failure is due to outside circumstances, for example the premature withdrawal or reduction of funding by the bank, or the failure of a key customer. That would not, on its own, amount to wrong doing.

Wrong doing is often a ‘you know it when you do it’ kind of thing: Like if you withdraw cash from the company for personal use, make loans to yourself that haven’t been approved by shareholders, pay off your creditor ‘mates’ and leave others unpaid, or generally do anything which, in the context of a company which is struggling to pay its creditors, serves your interests above the company’s and creditors’ interests.

If I put my company into liquidation I can start up a new one with the same or similar name

Yes you can, but only if you follow, to the letter, the statutory rules. If you don’t, you will not only become automatically personally liable for each and every debt owed by the new company, but will be committing a criminal offence that could see you sent to prison.

I’m ashamed to go bankrupt or put my company into liquidation

Some people have the misconception that going into formal insolvency is a personal failure or some kind of ‘cop-out’. In fact, it is much more responsible than taking no action at all which could cause even more loss to your creditors.

Also, as a director you have a duty to stem loss to creditors, so could be personally liable for debts if you don’t put the company into formal insolvency at the right time.

Don’t be hard on yourself

Sometimes bad things happen to good people and there’s nothing you can do about it – it is no one’s fault.

Provided your business and trade has been free from misconduct, you should not feel ashamed at any point.

As is the case with any situation, ignoring it won’t make it go away and there are often a few small steps you can take to mitigate any extensive damage – you may even be able to avoid formal insolvency altogether.

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